Are commodities worth a go?

As China trends towards slower growth in the long term, the issue for ­Australian investors is where the opportunities are. Economist Andy Xie suggests commodities are headed for a long bear run because China simply has to cut back on investment growth.

At the same time, global demand is contracting as more supply comes on line.

BT chief economist Chris Caton doesn’t believe the commodities boom is coming to an end, and suggests Australia’s “mining boom will keep going for a long time” as there will be more of a need for our iron ore.

His opinion is backed by Fat Prophets managing director Angus Geddes who says a lot of the “froth” has already gone out of the sector and it probably won’t head over the abyss.

“It’s nearly time to have a look at the commodity sector,” he said.

For Chris Weston of IG Markets, another story for investors is what ­happens to the Australian dollar if the bottom drops out of iron ore and it heads towards $80 a tonne as posited by Xie in some of his analysis.

Weston can see lower demand for Australian commodities as the Chinese government pursues quality growth over quantity, in a bid to raise domestic consumption. For him, the question is how to prepare the economy for this change.

He suggests the Reserve Bank will probably have to cut interest rates, and cut aggressively. “The RBA will have to use interest rates as a blunt instrument, especially if there is a surge in unemployment and lower commodity prices. It will have to join the global monetary easing battle.

“And with that, you have to look at what 1 per cent interest rates would look like. For starters, people’s savings would take a bath. They would be forced into other assets. The best option might be high dividend-paying stocks, such as Telstra. You would have to look at companies with robust earnings growth,” Weston said.

As for the Australian dollar, Weston believes the high dollar has been “net negative” for the Australian economy, as it has been detrimental across the board. The key, says Weston, is to watch what happens when the dollar starts to hover too high for too long at around $US1.08, as the RBA will probably have its hand forced to lower rates at that point.

On the international front, Andy Xie believes investors should look at the big brands. “Western globalisation has most benefited multinationals. People talk about economic growth, but look at the profit side, and the rewards go to global companies.

“They’ve been able to leverage their global footprint and decide where to take production and where to sell. Through economic ups and downs, they have done very well.

“If you have long-term money, I would put your money into global companies – those with technology and brands that have some sort of market entry barriers.

“Capital per se is not worth money because everybody has capital. There’s too much capital flowing around the world. What you have that cannot be duplicated by someone else – now that’s worth money. Long-term money like pension funds should be in global companies.”

On the other side, Xie believes short-term investors should go along for the ride with global governments.

“You should speculate along with the government. When the US Federal Reserve wants to help the US financial system, you should buy bank stocks. I don’t think the banks are well run, but they’re driven by this policy of quantitative easing.”

As for the safe bets, Xie believes gold’s dive is merely temporary. “I disagree that gold is coming down long term. The same people who speculate in copper also speculate in gold, and it’s the old economic theory of forced selling. Once you lose money in bad assets, you sell good assets because they’re liquid. We saw that in 2008 – gold is liquid, so you sell gold,” Xie said.

Moreover, Xie believes bad economic news is unambiguously good for gold. With the world’s governments addicted to what he calls “bad growth” by prolonging quantitative easing, money printing will go beyond what the inflation threshold will dictate. “Gold will enter a prolonged bull market – it will make new highs,” he said.

Weston agrees that while gold may continue to come off sharply, the question is what level you buy back in because long term, it will rise.